Friday, February 14, 2014

Sheng Siong Group: Still in steady hands (OCBC)

Sheng Siong Group:
Fair value S$0.70
add: 12m dividend forecast S$0.03
versus: Current price S$0.60
Still in steady hands

We understand from a recent meet up with Sheng Siong Group’s (SSG) management that the highly anticipated e-commerce is in its pilot phase. Management prefers to only roll it out on a larger scale when the pilot phase has tangible success. We estimate margin improvements of 0.5ppt to 1ppt as more direct sourcing and higher warehouse utilisation materialise. Its dividend policy of 90% payout ratio that expires in FY14 will be closely watched as it is what makes SSG a yield play. We think possibility of property acquisitions might prompt management to rethink whether they should retain more earnings instead. Due to a change in analyst and assumptions, we maintain BUY but lower our fair value estimate from S$0.78 to S$0.70. This is mainly because of updated higher cost of equity.

E-commerce in pilot phase
Sheng Siong Group (SSG) has commenced its e-commerce business for limited areas which currently makes negligible contribution to the group. We understand from a recent meeting with management that they are still promoting it to bring more clients on board. They will also wait for the pilot phase to be completed and reasonably successful before expanding to cover whole of Singapore. We view this as a prudent move as it shows how SSG takes calculated risks.

Expect better margins from direct sourcing and higher warehouse utilisation
The Mandai warehouse is currently 75% utilised, where ~S$390m of goods sold in FY12 were handled. Management has guided an increment to ~S$500m of goods per year are to be handled. Through more direct sourcing and utilisation of the warehouse, we expect gross profit margin to improve by 0.5ppt to 1ppt in FY14.

Guidance on future dividend policy to be closely watched
SSG’s 90% payout ratio dividend policy will expire in FY14, and question remains on its continuation. Should the payout ratio be decreased drastically, SSG would lose some attractiveness as a yield play and possibly affecting the share price. In 2013, unfavourable rental markets saw SSG reluctantly attempting to acquire properties. With a net cash of ~S$108m as of 3Q13, SSG has sufficient buffer for three stores of its current average store size of 12k sqft at an assumed S$2,500psf. However, we think possible further property acquisitions will be a major factor in deciding future dividend policy, noting that the current 33 stores (excluding Yishun Junction 9 which is awaiting final authority approvals) is still 17 short of the target 50 stores.

Maintain BUY
Due to a change in analyst and assumptions (largely due to a higher cost of equity), we have a DCF-derived fair value estimate of S$0.70 (previous: S$0.78).

Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 10/02/14

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